US Economy Faces Risk of 'Fiscal Cliff': Fed Officials

Two Federal Reserve officials warned Tuesday that the U.S. could be heading for a "fiscal cliff" at year's end if mandated tax increases and spending cuts are implemented.

CNBC

Federal Reserve Presidents, Charles Evans and Dennis P. Lockhart

Charles Evans of the Chicago Fed called the cliff a "big uncertainty" while Atlanta Fed President Dennis Lockhart said there could be a "financial shock" if markets begin to anticipate that Congress and the White House do little to address this situation.

The expected tax increases and spending cuts were triggered when a congressional "super committee" failed to come up with a way of closing the federal budget deficit.

Both Fed officials spoke during the Milken conference in Los Angeles. Earlier Tuesday, on CNBC, both agreed the slowing U.S. economy is disappointing, but differed on the need for continued stimulus.

"I’d like nothing better than to start raising rates before late 2014 on the strength of a stronger economy," Evans told Squawk on the Street.

Noting there's "tremendous room" for more accommodation, the Chicago Fed chief said that "more liquidity would be helpful. It would ratify the idea that [Fed] policy is going to be accommodative for a very long time to get things going. Look, we might get lucky in the sense that ... the channel opens up and we get a greater lift in the economy."

Rather than keeping rates low until late 2014, Evans thinks the Fed should use "economic triggers" on which to base accommodation such as keeping low rates if the unemploymentrate is above 7.5 percent "unless inflation unexpectedly goes up to a very high level, say 3 percent."

Lockhart is more skeptical and also concerned about triggering higher inflation . The Atlanta Fed president said that while the first-quarter GDPand March jobs data were disappointing, "I am a bit reticent to pull the trigger on any action. We have to see how the economy evolves. Pulling a number out of the air is a bit too simplistic."

He added, "There’s only so much we can do to stimulate loan demand, and to change the risk appetite of the financial system or banks, so I’m not sure that more really active stimulus in the form of quantitative easing , for example, would have that much of an effect. But the longer-term costs have to be kept in mind, costs related to inflation expectations, for example."

Both Fed presidents said they know the continued low interest rates are hurting savers.

"We're in a tough situation and the current slow recovery is hurting everybody," said Evans.

Lockhart noted that "we can only have one policy, and that policy is designed to support the recovery. So unfortunately there are winners and losers."